Death of commodities greatly exaggerated

By Pratima Desai - Analysis

LONDON (Reuters) - To some the six-year bull run in commodities is definitely over, but depressed markets and deep cuts in output may yet set the stage for another bubble.

When that will be is uncertain given the crisis engulfing financial markets, but many investors take the view a significant recovery could be at least two years away.

Before then, many producers of grains, oil and industrial metals will have cut output or gone out of business because the prices they can charge for their products have fallen too far.

"Bubbles have happened in the past and they will happen again," said Ian Morley, a director at fund manager Quantum.

"It's not just hot money, but actually mass self-delusion by people in the market, including the so-called experts."

The battering commodity markets have taken can be seen in the Reuters-Jeffries CRB index .CRB, a global commodities benchmark, which this month fell below 210 points, to its lowest level since 2002. It leapt to a record above 473 points in July.

"People have to invest for the long term, for that you need consistently higher prices," Morley said. "When growth recovers, which will take 12-18 months, prices will head back up."

Large cutbacks have been announced in the production of aluminum, used in transport and packaging, and in nickel and zinc, key ingredients for the steel industry.

Producers of copper used in power and construction have been slower off the mark, but they could follow as growth stagnates in developed countries and slows in the emerging world.

"The lower prices go and the longer they stay low, the bigger the next boom will be," said Stephen Briggs, analyst at RBS Global Banking & Markets.

"The key for the next cycle is that projects are being deferred and canceled which means they may not come on stream in time for when demand is growing strongly again."

Global miner Rio Tinto (RIO.AX)(RIO.L) said on Wednesday it would slash capital spending and sell assets as it battles the collapse in commodity prices.

EUPHORIA

The euphoria in commodity markets was fueled by investors looking to diversify away from stock markets after the crash in 2000 and seeking high returns to shore up their balance sheets.

Hot money followed institutions such as pension funds and gains accelerated. Many commodity prices hit record highs in July, despite signs of economic trouble ahead.